Drug pricing policies and the future cost of cancer

I graduated in 2006 with a Ph.D. in health policy and economics from Harvard University’s interfaculty initiative in health policy—and have been a faculty member at the University of Chicago ever since. I have been passionate about public policy and health for a long time and have been fortunate to marry those interests into a research career.

Where did your passion for specialty drugs and particularly cancer come from?

Frankly, happenstance inspired me to focus on specialty drugs, particularly cancer: The University of Chicago’s Comprehensive Cancer Care Center is world renowned for developing new approaches to treating cancer. This has evolved into a research program centered on two questions: What is the value of new specialty drugs? And, what are the intended and unintended consequences of public policies that aim to “bend the cost curve” in specialty care?

Tell us more about your latest research.

I have just completed a series of papers on the pricing of cancer drugs. In both, I try to define the financing, organization and regulatory features of this market that make it unique.

In the first paper, I and Ernst Berndt (MIT, Sloan School of Management) examine the impact of loss of US patent exclusivity (loss of exclusivity or LOE) on the prices and utilization of cancer drugs between 2001 and 2007. We base our analyses on nationally representative data from IMS Health. We observe substantial price erosion after generic entry; average monthly price declines appear to be larger among physician-administered drugs (38 to 46.4 percent) compared to oral drugs (25 to 26 percent). Additionally, we find average prices for drugs produced by branded manufacturers rise and prices for drugs produced by generic manufacturers fall upon LOE. The latter effect is particularly large among oral drugs.

In the second paper, I, David Howard (Emory University) and Peter Bach (Memorial Sloan Kettering Cancer Center) assess trends in the launch prices for 58 anticancer drugs approved between 1995 and 2013. We find that anticancer drugs’ benefit-and inflation-adjusted launch prices increased by 10 percent annually, or an average of $8,500 per year.

In 1995, patients and their insurers paid $54,100 for drugs that extended their life by one year. A decade later, in 2005, they paid $139,100 and in 2013, they paid $207,000 for the same benefit.

What are the biggest revelations from the research?

A couple of things: First, we should expect substantial price erosion when cancer drugs go off patent. Whether generic drug use will overtake branded drug spending in the specialty drug market just like that observed in the primary care space, is largely dependent upon policies enacted by government and commercial insurers encouraging this use. Second, the number of manufacturers making specialty drugs when they go off patent is very small and may even be smaller than we estimate because of the presence of contract manufacturing arrangements.

On branded specialty drug pricing, we believe generous third-party coverage that insulates patients from drug prices; the presence of strong financial incentives for physicians and hospitals to use novel products; and the lack of therapeutic substitutes creates a set of very unique conditions. This allows manufacturers to set the prices of new specialty drugs at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices.

How do you think these findings might change how drugs are developed now and in the future (the R&D process)?

In the specialty drug space, these arrangements make it challenging for parties interested in monitoring competition in the generic and branded drug market to predict reliably what the supply of drugs will be following mergers, acquisitions and/or closures of manufacturing facilities here and abroad. Indeed, one implication of our analysis is that the number of manufacturers with capacity is likely much smaller than previously documented.

On branded specialty drug pricing, our findings suggest that drugs addressing largely unmet medical needs and/or where mortality remains high will remain able to command a price premium. Changes in the policies that govern demand for these drugs in the United States may fundamentally alter their pricing levels and trends. I also believe premium pricing is pulling investments into specialty drugs that would not normally meet return on investment calculations. Therefore, changes in the policy environment might have swift implications for many development projects.

If you had a crystal ball, what is the most important change you would like to see in how drugs are developed and marketed?

In the United States, I would like to see physicians and hospitals get out of the business of making money from specialty drug acquisition costs and their reimbursement by Medicare and commercial insurers. This small change would dramatically refocus all stakeholders—manufacturers, payers, and physicians and hospitals—on the value of specialty drugs.